Fix tax inequity to make climate change progress

British Columbia’s carbon tax is the key strategy in the province’s fight against climate change. The tax reduces the emission of greenhouse gases and raises more than $1 billion of annual revenue. This revenue is then returned to residents and industry, mainly in the form of other tax reductions. The carbon tax also receives international attention as an innovative policy. But B.C.’s next government has to make critical decisions about building on this policy.

B.C. has legislated commitments to reduce its GHG emissions by 33 per cent by 2020 relative to 2007. A recent Ministry of Environment progress report says that “B.C. is within reach of its interim 2012 target.”

However, few climate policy experts think that current policies are strong enough to achieve the 2020 target, particularly with the current rush to develop the province’s mineral, coal and natural gas resources. If soon-to-be-released GHG emissions data show the province to be off-track relative to 2012 there could be a temptation for the next government to weaken the 2020 target. This temptation should be resisted. Interim targets act as benchmarks to help in evaluating and adjusting policies in order to keeping heading toward longer-term objectives.

There is something that the next government can do immediately to strengthen climate policies, bring in more revenues and deal with a taxation fairness issue. A big inequity is baked into the current carbon tax policy. Although industry pays carbon tax on GHGs produced by burning fossil fuels, it is exempted from taxes on non-combustion emission releases. Industrial sectors do better or worse by this arbitrary exemption depending on their mix of emissions. And households do not produce non-combustion GHGs, so they have no exemption.

Ministry of Environment data on 2011 industrial emissions, verified by third-party experts, indicate that natural gas and oil companies vented and leaked 4.4 million tons of non-combustion GHGs into the atmosphere. No tax was paid on these emissions. This represents foregone revenues of $132 million dollars in 2011 at the current tax rate of $30 per ton. The total lost revenue from all industrial non-combustion GHG releases was $171 million in 2011.

In its 2013 Budget papers, the Ministry of Finance says that it will not expand the base of the carbon tax to include these non-combustion GHGs because of concerns about competitiveness. This is a weak argument. In instances where competitiveness can be validated, some or all of the increased revenues can be returned to companies via other tax reductions, just as is done now. The carbon tax provides a price signal to help reduce emissions without necessarily affecting a company’s bottom line. More fundamentally, by not pricing these GHG emissions, industry is not paying for one of its production costs — the use of the atmosphere for waste disposal. These costs are then imposed worldwide in the form of climatic impacts.

The Ministry of Finance also says that it may consider changes to the carbon tax when other North American jurisdictions introduce carbon pricing. That time is now. Nine northeastern U.S. states have been pricing their main carbon sources via a cap-and-trade system since 2009. California began pricing GHG emissions, including non-combustion emissions, earlier this year. Quebec will soon join California’s system.

As well, the federal Environment Minister indicated in February that he will soon be introducing specific national GHG regulations on the oil and gas sector. Direct regulatory controls for industry are seen by most economists and industry officials as more costly and burdensome than using simple carbon pricing mechanisms. Federal legislation allows provinces to negotiate equivalency agreements that back out federal environmental rules if a province has mechanisms in place that result in the same or better environmental outcomes. B.C. can’t do this for the natural gas sector if it does not apply a carbon tax to vented GHGs.

The B.C. government recently floated the idea of increased royalties on exports of liquefied natural gas. Getting a proper return on natural resources owned by the Crown is common sense. But determining these royalties should be the final step after other taxes are appropriately established.

Getting the coverage of the carbon tax right is also a necessary step before looking more closely at B.C.’s GHG targets and possible increases in the rate of the carbon tax.

There’s another reason this is important. B.C.’s water supplies, forests and coastal communities are all extremely vulnerable to changing climatic impacts. As one example, a recent report from the B.C. government indicates that more than $9 billion in expenditures should be anticipated in the Metro Vancouver region on necessary coastal defences against sea level rise before 2100.

B.C. needs to build on its existing efforts to keep pace with these threats and with other active jurisdictions. Including all appropriate greenhouse gases in the carbon tax base is an obvious next step.

Lee Thiessen was executive director for climate change policy with the Climate Action Secretariat, Ministry of Environment, until his retirement last year.

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Fix tax inequity to make climate change progress

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